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Because we're also doing a live market update this month, this note is (hopefully) going to be on the shorter side...but no guarantees.
We've written about inflation before. It was a couple years ago now, and the thesis was basically that wage inflation would pick up, signaling minimal slack in the economy and the need for tighter monetary conditions going forward that had the potential to prick the stock bubble. Spoiler alert: that didn't so happen so much. Real wage inflation did pick up and actually spent most of 2018 and 2019 above 3% before sliding back to the mid-2%'s as the calendar turned into 2020. What ended up popping the equity bubble was not wage inflation but rather a little spike protein on the surface of the SARS-CoV-2 virus. Of course, that equity bubble was subsequently reinflated faster than you could say "Thank you sir, may I have another", but there's still an interesting question of inflation on the table. Namely: are we headed into disinflation/deflation, or are we headed in the other direction into (perhaps significantly) higher inflation? It's an important question, because the kind of investments that tend to do well during inflationary regimes are categorically not the kind of investments that tend to do well during deflationary regimes.
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Robin Hood: Men in Tights - a great movie from the early 90's (which, not to make anyone feel old but was 30 years ago) starring Westley from The Princess Bride, Dave Chappelle, and Patrick Stewart.
Brilliant! Anyway, it's a Mel Brooks movie, so it's a hilarious parody of the Robin Hood story, in a similar vein to Young Frankenstein. And this is relevant to this month's note because there is another hilarious Robinhood parody playing out right now: Robinhood, the online brokerage platform, and the parody is the stock market, and by hilarious we mean sad. With nothing to do except stay at home under shelter-in-place orders, people apparently turned to day trading in a big way. It seems like the combination of time, boredom, stimulus checks, and no sports to bet on have people piling into the market (see: anything from Dave "Davey Day Trader" Portnoy, founder of Barstool Sports-turned day trading stock market guru who picks stocks out of a Scrabble bag and whose first maxim of investing is: "Stocks never go down"). E*Trade, TD Ameritrade, and Charles Schwab all saw record new accounts in the first quarter of the year. All 22 trading days in March were among Schwab's 30 most active days ever. Mel Brooks has already made one parody movie entitled Robin Hood: Men in Tights. The year was 1993, and you had Westley from The Princess Bride, Dave Chappelle, and Patrick Stewart all on screen at the same time. Brilliant.
And now, nearly thirty years later, we have a real-life Mel Brooks-ian parody playing out in the stock market. May I present - Robinhood: Men in Tights (the reprise). "Capitalism is the worst economic system ever invented...except for all the other ones."
- Winston Churchill (paraphrased) et al. One of the main effects of this virus - and our response to it - has been to shine a light directly on all the broken parts of our societal system. A really harsh, fluorescent light. In some cases even a seizure-inducing strobe light. Whether your particular flavor of failure du jour is institutional, political, economic, macro, or micro, there is something there for everyone. Remember all the outrage over "faithless electors" a few years ago? That was people waking up to the fact that their vote doesn't matter. In point of fact, you don't actually vote for President at all. You are really voting for which party you want to appoint a donor fundraiser elector to vote for you. This is like that, but with everything. In the interest of page limits, we'll stick to our broken economic system for now: Covid killed capitalism. Well. We knew we didn't have any kind of monopoly on rogue waves, but this one...wow. Iceberg ahead, captain.
In early March, when stocks were down 15%, we wrote that if you were asking yourself "should I be selling stocks", our answer was "yes". Apparently, nobody listened. Shelter-in-place orders turned people to day trading in a big way. E*Trade, TD Ameritrade, and Charles Schwab all saw record new accounts in the first quarter of the year, with Schwab alone reporting 300,000 just in March. All 22 trading days in March were among Schwab's 30 most active days ever. For the new hundreds of thousands of you that will soon be asking "should I sell my stocks", we will reiterate: yes. What a time to be writing an April newsletter! We've picked up a few new readers since last year, so before we jump in here, just a quick reminder that April is the month we let our tinfoil hat flag fly. In previous years, we've looked at The War on Cash, the Looming Pension Crisis, and the Magical Groupthink necessary for our economic system.
In a spooky bit of foresight, last April's newsletter asked you, dear reader, to "put 1984 back on top of your summer reading list". If you didn't, do yourself a favor and definitely put it on your quarantine reading list, because we are there. What do Machiavelli, Churchill, Rahm Emanuel, and the Washington Post all have in common? This newsletter. This month we'll look at the intersection of the phrases "Never let a good crisis go to waste" (Machiavelli/Churchill/Emanuel) and "Democracy dies in darkness" (WP). Because what we have right now in this country is a very good crisis and a whole lot of darkness. This will be a link-heavy newsletter, as we attempt to shine a light on various things that are actually happening. We leave it up to you to make your own connections and follow the rabbit hole as deep as you'd like. Part 2. There is so much to unpack economically here, it might take us the rest of the year. So we’ll just start for the time being with a real-time post-mortem of the stock market and economy. A peri-mortem, perhaps. Things in the land of fiat money and made up valuations are...bad. Like, Stewie destroying Mr. Rogers’s Land of Make Believe bad.  The S&P 500 had a closing high on February 19 of 3,386. As we write this on March 19, exactly one short month later, the S&P 500 is sitting at 2,323 about 15 minutes into the trading day. That is a loss of 31% in a month, which is the fastest drop into a bear market from an all-time high on record (the red line).  There is so much fear flying around right now. And we loathe it. We have written about this before, but using fear to compel action is just the worst. And what we have right now is large-scale policy responses born out of fear. There was a meme that was shared with us the other day that we feel is very appropriate:  As I’m writing this (first week in March), the market is in the middle of some obscene volatility thanks to the coronavirus that has started taking over the world like the second coming of Genghis Khan. The crystal ball is decidedly murky on this one, so no telling what things will be like when you’re reading this in April, but here’s hoping the zombie apocalypse chapter story you’ve read in these very pages hasn’t been a massive case of cosmic foreshadowing!
Something I’ve heard a lot in the last week from clients is: “should we be selling stocks?” Perhaps you’ve had the same thought yourself. Fortunately, there’s a straightforward answer to that question: yes, you should sell. But, but....what about long-term investing and buying the dip and “the market will recover” and everything else people say? Irrelevant! Let me explain:  We had originally intended to keep unpacking December’s This One’s For Us newsletter and get into the superstitions and black magic of technical analysis...but things have taken a rather interesting turn in the last week, so let’s address the elephant - er, the bioengineered microscopic pathogen - that’s (probably) in the room. It’s not yet April, so we’ll try really hard to stick to facts...or at least what has been publicly admitted to.
Here’s what a pandemic looks like: In honor of it being March, let’s talk about leprechauns.
First - did you know that Leprechaun (the movie) was Jennifer Anniston’s first film role? Starring film role, that is. Apparently she had a bit part as one of the McDonald’s dancers in Mac and Me in the late 80’s. Which, from what I can gather, is kind of like if E.T. was produced, directed, and starred Ronald McDonald. But I digress. Back to leprechauns! Second - did you know that prior to the 20th century, leprechauns were depicted as wearing red, not green? True story. Yeats actually claimed both, that it was the solitary leprechauns who wore red and the “trooping” ones that wore green. So go ahead and wear your red proudly at the St. Paddy’s Day parade this year, you solitary leprechaun, you. Third - we all know about the leprechaun’s pot o’ gold, ostensibly at the end of the rainbow. But do you know what leprechauns do for a living? Yes, they have an occupation. They are - wait for it - cobblers. Which, unless things are drastically different in the fairy realm, is not the most lucrative of professions. So how does a race of (usually) unseen cobblers become known throughout the world for hoards of gold coins? The only possible explanation is that… Fourth - leprechauns are masterful savers. While I can’t entirely condone the whole “bury your gold in the ground” thing, I think there’s a lesson for all us in the uniform way that leprechauns across the board have managed to save up massive amounts of money. Way back in the first ever Rogue Waves, I gave out the two secrets to investment success. Remember what they were? Time and compound interest. Leprechauns are perfectly illustrative of the time component. Even if you get zero growth on your money, a little bit of savings will turn into an entire pot of gold with enough time. Now, since you as I, as mere humans, don’t have the savings time horizon of a leprechaun, we’ll need to take advantage of investing secret number two: compound interest. How do we do that? There’s an easy bit and a hard bit. The easy bit is to put your money in things that actively pay you interest or dividends - bonds, real estate funds, dividend-paying stocks. Happy to talk through your options with you. The hard bit is putting your money in things that actively pay you interest or dividends AND match your risk tolerance. If you see your account value going down and you hit the eject (sell) button, then both your compound interest AND your time stop working for you, and you’re 0 for 2 on the investing secrets to success. At which point you may very well think it a good idea to start chasing rainbows looking for pots of gold. Until Discovery Channel starts airing a “Rainbow Chasers” reality TV show, that’s probably not a brilliant way to make money. Stick to the budgeting/saving/compound interest over time method, and you’ll be alright. And if you need a little help getting on that path, drop us a line - russ@atiwealthpartners.com. Sláinte! Three weeks into 2020 and things continue apace. The world has been to the brink of war and back (remember that?), the impeachment trial is finally underway, and now there’s fears of a new global pandemic. Meanwhile, markets are up over 2% on the month, which annualizes to another 30% year. Which is absurd, so don’t get your hopes up. As for the “why”, well it’s certainly not due to fundamentals. Global trade (as measured by the Baltic Dry Index) is at a 9-month low and falling, and the IMF has cut their global growth forecast to 2.9%, which is the lowest since the financial crisis...and those forecasts tend to be optimistic. But thankfully the Fed shows no signs of slowing their repo operations, so the market has the green light to keep going higher. The Fed even - get this - floated the idea of lending directly to hedge funds during the next liquidity crisis.  It’s beach renourishment time again! The dredges and pipes and bulldozers are all hard at work this offseason fighting with mother nature to try and keep those free-spirited sand grains in one place. Or at least temporarily reset them, I suppose. The more cynical among us might argue that it’s a bit of a losing battle...but man does that new beach look good.
From time to time, it’s a good idea to give your portfolio a little renourishment as well. We’re not talking about selling everything and starting over - after all, you don’t scrape the beach away down to bedrock and then rebuild it. You just need to move some things around a little bit. There are all kinds of pithy sayings out there about how to renourish your portfolio: “cut your losers and let your winners run”, “if you liked it before, you should like it even more now that it’s cheaper”, etc. Gag. All you really need to do is a simple rebalance. Happy Holidays, dear readers! Believe it or not, the vast majority of the newsletters we write are not, in fact, for our own entertainment. A couple of them definitely are - notably the April Tin Foil Hat series and the October Halloween series - but apart from those semiannual gems, most of the time we are trying to educate, inform, amuse, explain, entertain, and/or deobfuscate.
This one, however, will likely turn out to be none of that. If you’ve been paying attention to those trade confirmations that hit your inbox at the stroke of midnight, you’ll have noticed that we’ve been busy headed into year-end. The following is a glimpse into what we’re thinking, and why. Fair warning, it may feel a bit like climbing up an Escher staircase. But like we said, this one’s for us. Hindsight is 20/20, as they say. Unfortunately, since my benevolent overlords editors here at Beachcomber have these things called “deadlines”, there is absolutely zero hindsight available for this first Rogue Waves of 2020, as it is, in fact, still 2019 as I write this. Which must mean it’s Magic 8-Ball time!
What’s that? You think we meant to say “crystal ball”? Ah, yes, that is to be expected given all the punny ways you can put “vision” and “2020” together for economic forecasting. But from time to time we like to refrain from beating a dead horse. And also, economic forecasts are useless. |
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